Whether you are starting a family or nearing retirement, there are considerations to be made as to your need for life insurance. Many people don’t think they need it, and if they think they might, they don’t necessarily know how much they require. In fact, where you are in your life will determine how much insurance coverage you need, and this will vary according to each unique situation.
What Do I Need It for and How Much?
As a general rule of thumb, when determining how much life insurance you will need you must consider your debt obligations, both present and future, compared to your assets. For example, your immediate need may be to cover the mortgage and replace income lost from a deceased spouse, but your future need may also include helping your children through college. You must then consider the value of your assets, and whatever the shortage is would be the essential shortfall to be covered by life insurance. On average, most people need about 5-10 times their annual income when considering an adequate amount of coverage, but again every situation is different.
You may be a young adult starting a family and thinking, “What do I need insurance for if I don’t have many assets to protect?” For many, the home they live in would be enough to protect, should something happen to one of the spouses contributing to the household. And as previously mentioned, it may not be needed to protect assets per se, but also to cover a current or future cash flow need, such as childcare or college expenses. The amount of insurance coverage will vary between families and their level of comfortability that they are seeking, but when we lose a loved one the emotional stress can be so overwhelming, that its extremely helpful to not feel the financial stress as well.
Saving for Retirement
The kids have graduated college, and the focus has now shifted to ensuring your remaining years in the workforce are geared towards saving for retirement in order to achieve your retirement lifestyle goal. Achieving this goal depends on working until retirement and thus saving and cleaning up debt. But if one spouse dies prematurely, the surviving spouse’s retirement may be in jeopardy. Should this unfortunate circumstance occur, retirement will undoubtably look different for several reasons, but the financial burden does not need to be an additional stressor. Without the savings cushion for retirement, the surviving spouse may need to delay retirement much later. Or, they may not have the assets needed to cover the essentials in retirement, such as healthcare related expenses. For this type of situation, you may consider a term policy to protect you until retirement.
If you have a disabled child and are concerned about providing for them after you’re gone, a whole life policy may be a good solution for you. Upon your death, the death benefit would pass to your child tax-free, and can be utilized as a resource to cover their needs.
Differentiating Types of Life Insurance
Generally speaking, there are two main types of life insurance available, and they can be offered in a variety of flavors, including hybrid products. For the purpose of this discussion, we will briefly touch upon the difference between the two broad categories of Term and Permanent Life (including Whole, Universal, & Variable Life).
Term life Insurance is the most affordable, as it only covers you for a period of time. This type of policy can always be renewed if there is still a need, although the premiums are subject to increase as you get older or your health status changes. For young folks starting out however, this type of policy can accomplish your need for coverage and affordability of premiums as youth and good health will help keep your premiums low.
Group life insurance, which is term insurance offered through your employer, may also be a great solution if available. Group life is usually free or will cost very little, as a result of pool sharing the mortality and expense risk as well as being subsidized by your employer. For some, the amount offered through a group policy will not be enough coverage and additional insurance may need to be purchased. For most, however, the coverage offered is enough and would be all you need. Just remember: group life insurance is term insurance that will cease upon retirement or termination of employment.
Whole life, on the other hand, is permanent life insurance and thus more expensive. There is a cash savings component to these types of policies that may be utilized during the insured’s life if needed and can also be used to pay the premiums for the policy. Because this is a permanent policy, the coverage will not lapse as long as the premiums continue to be paid. Upon the insured’s death, the death benefit will be paid to the beneficiary.
Who Doesn’t Need Life Insurance?
Those who have enough assets to support themselves and dependents should the need arise, do not need life insurance as they are considered self-insured. Conversely, individuals who do not own assets or have dependents may not need life insurance now; although planning for the future and obtaining a policy while young and healthy can be a smart strategy if you do expect to have the need in the near term. Lastly, it would not make sense for someone to purchase a policy if they cannot afford the premiums, even if the need is there. However, as we have discussed, it is still worth exploring with your financial advisor to determine if there is a policy that could work for you. Remember, some coverage is better than no coverage and term policies can offer protection with very reasonable premiums.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Kristina’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm or our parent company, Focus Financial Partners. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.